Grading Agencies Cidc

8/18/2019 Grading Agencies Cidc

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Grading ofConstruction & Real Estate Entities

CIDC & ICRA Ltd.


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Presentation Structure

• Real Estate and Construction - Engines for growth

• Concerns

• Efficiency Enhancement

• Need for risk assessment tools …

… (Grading)

Grading of Real Estate Entities


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Real Estate and Construction Sectors in India

Real estate and construction: contribute 10-11% to the GDP

Construction - Engine for economic growth - high multiplier effect

Organised Real Estate and Housing development - Key componentof country’s infrastructure development

Adoption of practices often do not support good quality asset

creation

------ While funding needs to be channelised to the right projects,benchmarking quality and efficiency of development is the need of the hour.


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Growth in Construction Sector and GDP(GDP at factor cost and constant prices)

0%

2%

4%

6%

8%

10%

12%

14%

2001 2002 2003 2004 2005 2006 2007 2008

GDP from Construction Total GDP


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ConcernsUnstructured regulatory frame work leading to

ineffective entry barriers

Inefficiencies

Lack of transparency

Credit flow to the sector can be widened

Value to the customer needs to be enhanced by mitigatingthese concerns

---------- Grading a facilitator


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Grading of Real Estate and Constructionentities

The Rationale

Tools for Choice

Differentiating Transparent Mechanism

ICRA option


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About ICRA

Set Up in I991 as a Credit Rating agency

Promoted by leading Financial institutions and Banks. Moody’sInvestors Service is currently ICRA’s largest shareholder

Diversified into Industry research, Performance Gradings, AdvisoryServices

Completed more than 4000 assignments across various sectors


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About CIDC

• Planning Commission, Government of India along with Construction

Industry have set up the Construction Industry Development Council(CIDC) to bring about the re-organisation of the Indian ConstructionIndustry. Shri. G. V. Ramakrishna and Dr Uddesh Kohli are ChairmanEmeritus of CIDC. Shri Chander Verma, Director, ContinentalConstructions Ltd. is the present Chairman.

• CIDC is now the Apex Nodal Agency for all types of construction andrelated activities in India. Construction is an activity which forms a majorpart of the capital expenditure of many sectors (and their correspondingMinistries). Founded by the Planning Commission, Government of India, ithas amongst its 87 members.

• The Council started functioning from August, 1996 and has taken upseveral important projects related to the vital issues of the ConstructionIndustry


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Who are being Graded ?

Real Estate entitiesThe Real Estate Project

The Real Estate Developer

Construction Company or the Contractor


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How would Grading help?Broadly…

Encourage transparency, objectivity and standardization

Enabling the Developers to benchmark themselves against competition

Provide effective entry barriers against inefficient operators

An input for decision making

Facilitate pricing and credit decisions

More specifically for the market participants ….


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… How would Grading help?Benefits of Grading Developer(s)/project:

Investors (end user / buyer of property / relevant stakeholder): Aware of the risks involved in the developer’s ability to deliver as per specified terms,

quality parameters, and,Transfer of ownership on time

Facilitate flow of institutional funds: A scientifically graded project would lend itself to a more accurate and reliable

estimation of risks thereby increasing the confidence of the lenders


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… How would Grading help?Facilitate effective alliances:

In real estate ventures through independent and objective opinions on the capability ofconcerned entities (such entities may include joint venture partners / participant in anySpecial Purpose Vehicle )

Facilitate positioning:

Especially a developer / project in an unorganised market

Moreover, grading would facilitate the overall growth of the real estate sector by providing the developers with incentives to conform to fair trade practices and legalrequirements


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… How would Grading help?Benefits of Grading of Construction Companies / Contractors:

The project owner / project developer:Select the appropriate entity and evaluate project completion risks

The contractor or the construction company:

Facilitates acceptance while highlighting his competence and eliminating unhealthyundercutting or unrealistic bidding

Facilitates funding and lowers its cost of funds


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… How would Grading help?

Lenders:

Independent and unbiased input to assess risk associated with the construction entity

Joint venture / joint venture partner:

Objective understanding of techno-financial capability for participating in joint ventures/ Special Purpose Vehicles

The ultimate beneficiary is the project itself , which would gain from the smooth flow ofwork through the deployment of compatible participants and availability of lower cost of fundsarising out of efficient availability of credit.


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What do we grade them on ?

The Real Estate Project

Project Strength

Price Risk – relative price of thefinal productResource Risk – adequacy andappropriateness of the resourcesmobilisedQuality & Non-ConformanceRiskProject execution Risk – relatesto capability of relevant agenciesinvolved in project executionTransfer of Ownership Risk

Permitting Risk – risks arising out of non-availability / delays in relevant

permitsPolitical RiskSite Risk – location and availabilityof infrastructureInterest Rate RiskPenalty Clause – extent of protection to the customersCompletion Risk

Business Risk


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What do we grade them on ?

Financial Risk- Cash Flow vs obligations : for project development and debt servicing

- Developer’s financial position and flexibility to support uninterrupted projectdevelopment

Management Risk- Track record of the developer - Promoter profile

The Real Estate Project

Project Strength


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The Grading Symbols

The Real Estate Project:

RT1 Very strong project . The prospects of successful implementation of thereal estate project and transfer of ownership as per terms are highest. The

project risk factors are lowest.

RT2+RT2RT2-

Strong project . The prospects of successful implementation of the realestate project and transfer of ownership as per terms are high. The projectrisk factors are low.

RT3+RT3RT3-

Moderate project . The prospects of successful implementation of thereal estate project and transfer of ownership as per terms are moderate.The project risk factors are moderate.

RT4+

RT4RT4-

Inadequate project . The prospects of successful implementation of the

real estate project and transfer of ownership as per terms are inadequate.The project risk factors are high.

RT5 Weak project . The prospects of successful implementation of the realestate project and transfer of ownership as per terms are poor. The projectrisk factors are highest.


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What do we grade them on ?The Real Estate Developer

Business Risk• Project development track record &

Market position• Project composition – On going

Projects• Adherence to time schedules and

local norms for development• Project Quality Record – past projects

and on-going projects. quality of entities deployed in execution.

• Project management capability• Contractual clarity with customers• Transfer of ownership / clarity of title

in projects• Customer satisfaction


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What do we grade them on ?The Real Estate Developer

Financial Risk• Profitability• Leverage• Financial Flexibility• Cash flow vs obligations Contingent Liabilities

Management Risk• Management Quality – promoters

and management profile


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The Grading Symbols

The Real Estate Developer DR1: Very strong project development capacity . The prospects of development of

real estate projects as per plan are best and the ability to transfer ownership asper terms is highest.

DR2+: Strong project development capacity . The prospects of development of DR2 real estate projects as per plan and the ability to transfer ownership as per DR2- terms are high but not as high as DR1.

DR3+: Moderate project development capacity. The prospects of development of DR3 real estate projects as per plan and the ability to transfer ownership as per termsDR3- are moderate. Project development capacity can be affected moderately

changes in the real estate sector prospects.

DR4+: Inadequate project development capacity . The prospects of development of DR4 real estate projects as per plan and the ability to transfer ownership as per termsDR4- are inadequate. Project development capacity can be affected severely by

changes in real estate sector prospects.

DR5 : Weak project development capacity .The prospects of development of realestate ro ects as er lan and the abilit to transfer ownershi as er terms are oor.


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The Grading Symbols

The Contractor

CR1 Very strong contract execution capacity . The prospects of timely completion of projectswithout cost over-runs is best and the ability to pay liquidated damages for non-conformance withcontract are highest.

CR2+CR2CR2-

Strong contract execution capacity. The prospects of timely completion of projectswithout cost over-runs and the ability to pay liquidated damages for non-conformance are high butnot as high as CR1

CR3+CR3CR3-

Moderate contract execution capacity . The prospects of timely completion of projectswithout cost over-runs and the ability to pay liquidated damages for non-conformance aremoderate. Contract execution capacity can be affected moderately by changes in the constructionsector prospects.

CR4+CR4CR4-

Inadequate contract execution capacity. The prospects of timely completion of projectswithout cost over-runs and the ability to pay liquidated damages for non-conformance areinadequate. Contract execution capacity can be affected severely by changes in the constructionsector prospects.

CR5 Weak contract execution capacity . The prospects of timely completion of projects withoutcost over-runs and the ability to pay liquidated damages for non-conformance are poor.


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A Case Study

Real Estate Project (P)

Synopsis

Developer India Ltd (DIL), a developer with over Rs 50 croreturnover, incorporated in 1995, undertaking a residential complexproject P worth Rs 50 crore.


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A Case StudyReal Estate Project (P)

Step 1: DIL submits mandate to ICRA for project P

Step 2: ICRA requests information through questionnaires


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Key information requested includes

I) Audited financial results (incl group companies)ii) Details of past and on-going projectsiii) Details of project P in terms of location,cost,scope, duration, land agreements,progress status, current bookings etciv) Terms of commitment to the customersv) Details of contractors and consultants associated with the project/planned to bedeployedvi) Funding profile of the project - means of finance and planned expenditure

vii) Organisation details

A Case Study


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Step 3: Project Site Visit-

• To assess the land / site status, local infrastructure,• To determine the effectiveness of project management• To assess quality practices actually adopted

Work practices looked at include

• Nature of executing entities deployed• Quality assurance systems

• Project management and supervision


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Assessment of uncertainty associated with project completion

• Expected activity time T e = ( T o + 4T m + T p )/ 6Where T o & T p are optimistic and pessimistic times, T m : most likely time

• Standard deviation = ( T o - T p )/ 6• Critical path evaluation• Expected project duration corresponding to 50% probability : sum of T e on critical path• Variance of project probability distribution : sum of Variance of T e• Probability of completing the project in x months is equal to the area under the normal curve from - ∞ to x


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Step 5: Financial Analysis (eg. Cash flow of the project,developer’s key financial indicators)

-20

-10

0

10

20

30

40

1 4 7 1 0

1 3

1 6

1 9

2 2

2 5

2 8

3 1

3 4

3 7

months

c r o r e

Inflow Outflow Cumulative

Developer’s financial flexibility to support the deficit for uninterrupted project development isassessed. Adequacy of cash flow for servicing future obligations is essential

A Case Study


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Step 6: Customer feed back & other secondary information

Step 7: Deliberations

Step 8: Grade assignment

A Case Study


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The Grading ProcessThe Steps :

Site Visits

Discussions withManagement

Grading Committee

Analysis & Report

Grade Assignment

4 – 6 weeks

Feedback from Customersand Information from

Secondary Sources

Team of Analysts


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The Grading Process• Traditionally Grading is asked for by lender / investor /

customer / JV partner / developer itself / any other

stakeholder

• Grading request / mandate to ICRA by Real Estate ProjectDeveloper for

• Grading of a specific Project / Projectsor

• Grading of the concerned entity as a Developer or

•

Grading of a specific project/projects as well as grading ofthe Developer as a whole

• Interactive process


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Grading of Real Estate entities published include...Real Estate Developers

Name of the Entity Location GradeBengal Ambuja Housing Development Limit Kolkata DR1

Bengal Ambuja Metro Development Limited Kolkata DR1Parsvnath Developers Limited Delhi DR3+Eldeco Infrastructure & Properties Ltd Delhi DR2

Real Estate Projects

Name of the Project Developed By Location GradeHiland Park Phase II Calcutta Metropolitan Group Ltd Kolkata RT2+Millenium Phase I Brigade Enterprises Pvt Ltd Bangalore RT2+Hiland Park Phase I Calcutta Metropolitan Group Kolkata RT2Westwind Right Address Projects Ltd Kolkata RT2ATS Greens - Phase II ATS Infrastructure Limited Noida RT2-Akshay Colony Suresh Enterprises Limited Hubli RT2-ATS Greens Village ATS Infrastructure Limited Noida RT2International Convention Centre-Ph I ICC Realty (I) Pvt Ltd Pune RT2-Golden Nest Ph XI-XIV Sonam Builders Thane RT3+Infinity Project Infinity Infotech Parks Ltd Kolkata RT2

……more are in progress


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ExampleCut off grade as specified in the Bidding Document - CR 2-

Bid submitted by the Contractors.

L1109.44L51140.96CR 1(v) E

L2109.61L41130.97CR 1-(iv) D

L4109.89L21110.99CR 2(iii) C

L3109.76L31120.98CR 2+(ii) B

L5110.00L11101CR 2-(i) A

LowestEffectivePrice

Lakhs

Status StatusQuotedPriceLakhs

Moderating Factor

HoldingGrade

Contractor


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Major Projects Looked at in course of CIDC-ICRA RealEstate and Construction Grading schemes

REAL ESTATE URBAN INFRASTRUCTURE

Joint sector and Pvt sector housing projects in Kolkata

Mass Housing cum commercial complex in Kolkata (19 lakh sqft)

Joint sector commercial-entertainment-residential complex in Kolkata (5.5 lakh sqft)

Convention Centre including shpping and office complex in Pune (4.8 lakh sqft)Residential Township with commercial facilities in Hubli (10.4 lakh sqft)

Commercial complexes in Gurgaon (2 - 4 lakh sqft)Mass housing cum commercial project in Ghaziabad (33 lakh sqt)

Housing Projects in Bangalore, Mumbai, Noida, Delhi, Kolkata, Chennai, HyderabadMass Housing project in Mumbai

Software Park in Maharashtra.

Software Park in Chennai

Software Complex in Pune

Petrochemical Research Facility in Gujarat

Water Supply schemes in Maharashtra and Karnataka


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… Major Projects Looked at in course of CIDC-ICRAReal Estate and Construction Grading schemes

Power

Govt and private sector hydroelectric projects in Himachal Pradesh

Hydro Power project in Jammu and Kashmir

Atomic power project in Maharashtra

Thermal power station in Andhra Pradesh

Power plant in Chennai

Ports

Dry Dock at Mumbai

Jetty and associated pipeline in Andhra Pradesh

Oil & gas

Refineries in Gujarat, Maharashtra and Assam

LNG terminal in Maharashtra


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Thank You

Grading Agencies Cidc

Documents